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Investor Information: The Valana Process

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The primary objective of the team in designing the Valana value assessment process was to identify what the money movers and "big players" on the markets look at when making decisions about what to buy and what to sell.

Over a period of approximately eight years extensive analysis and research were done utilising some of the following resources:

  • Published strategies used by the top stock market wizards around the globe
  • In-depth discussions with some very successful fund managers
  • Discussions with reputable stock brokers and other stock market analysts
  • Market trend analysis during and after specific events, such as upturns, downturns, cycles, etc.
  • Stock scenario analysis where strong rallies in share prices took place.

The "big players" obviously do not all look at the same things and even if they did, they probably look at it differently.

In the illustration below, the grey squares represent the possible criteria framework of different "big players" in the market when they look at companies, whilst the pink square represents the common denominators the Valana process identified as being important criteria considered by many of the "big players" in the markets.

The following phases were identified and built into the comprehensive analysis project:

  • Pool the collective experience, information and knowledge from all those involved.
  • Study and record the viable methods/approaches used by successful stock wizards.
  • Discuss trading principles and winning criteria valued by some fund managers.
  • Identify and evaluate enterprise performance elements that should be considered.
  • Test and evaluate the links between these elements as it relates to eventual performance.
  • Allocate weightings to the elements and assess the validity and reliability thereof.
  • Select several meaningful outcome components to be assessed when rating value.
  • Design a user-friendly model where the validated elements lead to a prediction outcome.
  • Do extensive validity and reliability testing and adjust weightings, where necessary.
  • Compile a simple layout illustrating some value element ratings for a stock.
  • Provide for ongoing validity testing and adjustments to sustain the model.

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This research done during the development of the model related to aspects, such as:

  • The impact and value of size, diversification and market capitalisation
  • The impact and influence of price to earnings ratio on the future performance of a stock
  • The discount value and impact of dividend elements on the future performance of a stock
  • The impact and benefit validity of earnings on the future movement of a stock
  • The impact and reliability of past track records on the future movement of a stock
  • The viability of identifying quality stocks and the benefit of holding on to such stocks
  • The performance and potential of equities versus other asset class investments
  • The role of investor psychology and random movement trends on the markets
  • Reliability of market noise, hype and other recommendations made by "stock pickers"
  • The impact of catalysts, such as interest rates, Forex differentials and commodity prices
  • The impact of specific developments related to stocks in certain market sectors
  • The impact and potential benefits to be obtained from verified market cycles
  • The impact and value of collecting tangible assets and building equity in companies
  • The reliability of trend patterns as a probable indicator of future price movements
  • The validity of target pricing and stop loss strategies versus trend patterns displayed
  • The pros and cons of diversification and many of the other hedging strategies available

Research showed that not all investors act at the same time and/or for the same reason. In fact, market participants clearly react differently to the same information or set of circumstances existing at a specific time.

It became clear that amongst the "big players" there were some that showed greater concern for a "top down" approach (trends and market force catalysts) and there were some who relied more on a "bottom up" approach (identifiable value and fundamental business analysis).

These two groups mainly represent short-term traders and long-term investors.

As the Valana model was primarily developed for the serious long-term investor, it was agreed to base the prediction format mainly on identifiable value and to a lesser degree on environment and market force probabilities. It was, therefore, decided to focus more on verifiable business elements and performance trends in assessing investment value.

In other words, the emphasis was mostly on a "bottom up" approach although a limited degree of "top down" assessment was also built into the model.

Finally, several fundamental enterprise elements and stock performance characteristics were identified that seemed to be considered and applied by most of the successful serious investors and other "big players" when making their decisions to buy or sell a stock.

The Valana process design is based on the following principles:

  • That there are no foolproof methods to make a lot of money quickly on the equity markets
  • There is no magic mathematical formula to enable one to only select winning stocks
  • Sound and profitable investing requires reliable information and thorough homework
  • One needs insight as to how the fundamental elements of a company relate to each other
  • Buying stocks are no different from buying companies, only the capital ventured differs
  • If one reacts to all the market noise surrounding stocks it becomes almost impossible to win
  • In the long run, few things will beat value, substance and sound fundamentals
  • A sound strategy, if adhered to, will always give the serious investor a competitive edge

After more than eight years of research and analysis the outcome of the research led to the following conclusions:

Over and above the myths related to the stock market, as covered elsewhere in this material, there were also some other interesting findings that influenced the thinking of the team when designing the final Valana model.

Even seasoned investors underestimate the discount impact of good dividend elements for a particular stock - the discount on the price over five years could be as much as 50%.

Good dividend yielding stocks, in the long run, will almost always outperform good growth stocks.

Earnings growth is often overestimated as a good investment signal by most investors.

Term (long investment horizon) and patience almost always ensure good returns with quality stocks.

The past track record of a company is much more important than most investors believe.

Stocks with a high PE ratio will often give a lesser return over time than those with a low PE ratio.

Holding on to good jewel rated quality stocks will eventually almost always provide a fair return.

The "Efficient Markets Hypothesis" claiming quality is already factored into the price of a stock may be flawed.

Selling stocks with good value ratings too soon will almost always be a mistake.

Movement trends in the business fundamentals of a company are more often than not a reliable future price predictor.

With a sound stock selection strategy, equity investments will almost always outperform other asset class investments over the long-term.

There is very little merit in looking at any single stock element in isolation - it is the relationship with the other elements that gives you the more reliable picture.

Value, discipline and term are the core components to successful investment in equities.

The real "gem" performers on the markets are seldom found amongst the Top 40 stocks.

Whilst charting may assist with the timing of a trade it seemed to have doubtful value for identifying good future value performers.

By considering most of the strategies and recommendations made by the really successful investors and devising formulas and weighted fundamental element relationships, a stock value assessment model was developed and extensively tested over the years.

The model validity and reliability evaluations done during the past years, showed a very high correlation between initial prediction and eventual outcome. (Refer "Illustration" under Model Validity).

The primary purpose of the Valana assessment model is to analyse and assess the inherent value and business fundamentals of companies listed on the FTSE/JSE and it should give the investor a very reliable indication of the probable odds for a listed company to perform well during the next year or so, after being assessed.

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